DoingHomework
Recycles dryer sheets
- Joined
- May 28, 2010
- Messages
- 254
Partly because of what I've read here about the whole "buckets" idea, I've decided that with retirement about 4 years out, I need to start filling our buckets for the first few years by moving money into bonds. The trouble is, since we'll both be under 59.5 for the first few years we'll need to pay for that period from taxable accounts (or 72t?). And during the next few years we are in the 28% tax bracket for any bond income.
I'm considering building these bond holdings in municipal bond funds. I know this is not the best time to be moving into bonds because interest rates are low. But I plan to be careful with duration so I'm not that worried about price decline.
My question is this: I have always avoided muni bonds because I believed that they "should" return the same as equivalent corporate bonds after accounting for taxes in the higher brackets (say ~35%). In other words, an investor in the 35% bracket would earn the same return after taxes in either munis or corporates. That seems to be the prevailing theory.
But when I start comparing actual returns over the last 10-20 years it doesn't seem to have played out that way. It seems like the "yield penalty" for the munis has made the break-even happen for an investor in a 20% tax bracket. I derived this by looking at similar funds in a couple of different families.
Does this seem right? The numbers speak for themselves but am I maybe missing something? For example, I'm wondering if the recent runup in muni prices is distorting things. What has been the actual experience over the last couple of decades of those of you that own munis? Has the return really been better than expected (after taxes) compared to corporates?
My conclusion from this, given that I do think I want to move into bonds because of our "lifestage" (not market timing), is that muni funds might be a good place to do it since we'd avoid taxes on the income and would not pay as big a penalty on yield as theory would predict.
We already have substantial bond holdings in tax deferred accounts as well as a "phantom bond portfolio" in the form of a government pension. But we'll be supplementing the pension with taxable money for the first few years.
Comments?
I'm considering building these bond holdings in municipal bond funds. I know this is not the best time to be moving into bonds because interest rates are low. But I plan to be careful with duration so I'm not that worried about price decline.
My question is this: I have always avoided muni bonds because I believed that they "should" return the same as equivalent corporate bonds after accounting for taxes in the higher brackets (say ~35%). In other words, an investor in the 35% bracket would earn the same return after taxes in either munis or corporates. That seems to be the prevailing theory.
But when I start comparing actual returns over the last 10-20 years it doesn't seem to have played out that way. It seems like the "yield penalty" for the munis has made the break-even happen for an investor in a 20% tax bracket. I derived this by looking at similar funds in a couple of different families.
Does this seem right? The numbers speak for themselves but am I maybe missing something? For example, I'm wondering if the recent runup in muni prices is distorting things. What has been the actual experience over the last couple of decades of those of you that own munis? Has the return really been better than expected (after taxes) compared to corporates?
My conclusion from this, given that I do think I want to move into bonds because of our "lifestage" (not market timing), is that muni funds might be a good place to do it since we'd avoid taxes on the income and would not pay as big a penalty on yield as theory would predict.
We already have substantial bond holdings in tax deferred accounts as well as a "phantom bond portfolio" in the form of a government pension. But we'll be supplementing the pension with taxable money for the first few years.
Comments?